Ladies and gentlemen, please stand by. Good day, and welcome to the Macerich Company Third Quarter 2022 Earnings call. Today's call is being recorded. Now at this time, I'll turn the conference over to Samantha Greening. Please go ahead.
Thank you for joining us on our third quarter 2022 earnings call. During the course of this call, we will be making certain statements that may be deemed forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, including statements regarding projections, plans, or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filings, including the adverse impact of the novel coronavirus on the U.S., regional and global economies, and the financial condition and results of operations of the company and its tenants. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplementals filed on Form 8-K with the SEC, which are posted in the investor section of the company's website at macerich.com.
Joining us today are Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer, and Doug Healey, Senior Executive Vice President of Leasing. With that, I turn the call over to Scott.
Thank you Samantha. Good morning and good afternoon. Unfortunately, Thomas is missing this call as yesterday he had a death in his immediate family. At this time, we send Tom and his family our love, support, thoughts and prayers. We are pleased to report another strong quarter with the majority of our operating metrics trending very positively. After a very strong first half of 2022, we also had a solid third quarter. We saw robust retailer demand. Tenant sales were flat in the third quarter. However, our portfolio average sales for tenants under 10,000 sq ft were $877 per sq ft, our highest level ever.
We continue to see traffic at about 95% of pre-COVID traffic, but comparable tenant sales are exceeding pre-pandemic levels, with year-to-date comparable sales up nearly 5% versus the same period in 2021 and up over 13% compared to the same period pre-COVID in 2019. The quarter continued to reflect retailer demand that is at a level we have not seen since 2015. Some of the other third quarter highlights include occupancy at quarter end was 92.1%. That was 180 basis point improvement from the third quarter of 2021, and a 30 basis point sequential quarterly improvement over the second quarter of 2022. We continue to see strong leasing volumes, which for the year are in excess of 2021 levels.
For the quarter, we executed 219 leases for 1.1 million sq ft. We saw same center NOI growth of 2.1% in the third quarter compared to the third quarter of 2021, which was a very strong quarter. FFO came in at $0.46 per share. On Thursday last week, October 27th, we declared a $0.17 per share quarterly dividend, which represents a 13.3% increase over the prior dividend. We continue to focus on redevelopment and repositioning of our top quality regional town centers. We are underway re-tenanting the approximate 150,000 sq ft, three-level east end of Santa Monica Place, formerly occupied by Bloomingdale's and ArcLight Cinemas, with an entertainment destination use, high-end fitness club, and co-working space.
Estimated project costs range between $35-40 million at an estimated yield of 22%-24%. We expect this redevelopment to be completed in 2024. We intend to renovate and re-tenant the Nordstrom wing of Scottsdale Fashion Square with luxury-focused retail and high-end restaurant uses. Estimated project costs range between $40-45 million at the company's share at an estimated yield of 13%-15%. We also expect this redevelopment to be completed in 2024. We continue to secure entitlements and/or plan transformative projects to redevelop at Tysons Corner, the former Lord & Taylor parcel with mixed uses and possibly flagship retail uses. At Flatiron Crossing in Broomfield, Colorado with the multi-phased mixed use densification expansion for which we secured entitlements late last year.
At Kierland Commons in Phoenix, Arizona for an expansion to add multifamily and office buildings to this amenity-rich property in the Northeast Phoenix market. We are excited to announce the addition of 130,000 sq ft Target to Danbury Fair Mall. The signing of Target completes the repurposing of yet another Sears box. Primark is already open in the upper level, and Target will open in the lower level in 2023. As we all know, Target picks and chooses its real estate extremely carefully, so the decision to locate at Danbury Fair is an enormous testament to the real estate and to the center's performance and reputation. As Doug will elaborate on shortly, we continue to be very pleased with the strength of the leasing environment.
As expected, given the depth and the breadth of leasing demand, we've had a very robust leasing result so far in 2022. Leasing interest continues to come from a very wide variety of categories and sources, including health and fitness, such as Life Time and others. Food, beverage, and entertainment, such as Pinstripes, Round1, and many others. Sports, grocery, medical, co-working, hotels, and multifamily continue at levels that frankly we've never seen before. Bankruptcies continue to be at a record low. We continue to expect to see occupancy gains and NOI growth through the remainder of this year and into next year. Now on to the highlights of the quarterly financial results. This morning, we posted solid operating results for the third quarter. Again, same center NOI increased 2.1% versus the third quarter of last year, excluding lease termination income.
Year to date, for the first nine months of this year, same center NOI has increased 10%, both including and excluding lease termination income. FFO per share for the quarter was $0.46. This was $0.01 better than the third quarter of 2021 at $0.45 per share. Primary factors contributing to this FFO per share increase are as follows. Firstly, a $10 million increase in gains from land sales, which obviously can be lumpy in any given quarter. Secondly, a $5 million increase in straight line rental income. This was driven by write-offs during the third quarter of 2021 of straight line rent receivables as we continue to work through our remaining pandemic-related tenant receivables assessments in 2021 last year. Third, a $3 million improvement in bad debt expense.
This was driven by $2 million of bad debt reserves in the third quarter of 2021 as we also continue to work through our pandemic-related tenant receivable assessments last year. We had a $1 million benefit third quarter this year in bad debts from collections of previously reserved tenant AR. Offsetting these positive factors were the following. Firstly, an $11 million decline in lease termination income. This was driven by a large lease termination settlement in the third quarter of 2021, which was from a national retailer that closed all of their stores within the United States last year. Lastly, an unexpected $4 million relative quarter-over-quarter decrease in valuation adjustments pertaining to our investments in retail funds. This morning, we updated our 2022 guidance for FFO. We narrowed the range and decreased the midpoint of our FFO estimates.
A 2022 FFO is now estimated in the range of $1.93-$1.99 per share. This represents a $0.02 per share decline in our FFO guidance at the midpoint. Most notably, this FFO range now includes an increased expectation for same center NOI growth in the range of 7%-7.5%. If this NOI growth is attained in 2022, given the 7.3% growth from last year in 2021, this would represent the second consecutive quarter of greater than 7% same center NOI growth as our core operating business has rebounded extremely well following the pandemic. This guidance improvement is due to better than expected top line revenue, including percentage rents, stronger common area revenue, and better than expected bad debt expenses.
We also increased our guidance for straight line of rental income as well as interest expense by equal and offsetting amounts of $2 million. Looking at the reasons behind our revised FFO guidance, which at the $1.96 per share midpoint is a penny ahead of street consensus per Bloomberg of $1.95 a share, the following factors contributed to that guidance change. Increased same center NOI, which is roughly $3.5 per share of FFO improvements. This is expected to be offset by two factors. One, the previously mentioned decline in retailer valuation adjustments represented about a $2.5 per share FFO decline. Then secondly, the timing of a very large land sale that was expected to close in late 2022, which is now expected to close in 2023.
This delayed land sale that should now land in 2023 represents a decline of FFO in 2022 of roughly $0.03 per share. To emphasize, our 2022 outlook for the core operating business continues to be very strong. Strong NOI growth, a very healthy operating cash flow of approximately $370 million before payment of dividends. More details of the guidance assumptions are included within our Form 8-K supplemental financial information, specifically page 16, that was filed earlier this morning. On to the balance sheet. We continue to focus on our remaining 2022 maturities. Year to date, we have refinanced or extended $580 million of debt at a weighted average closing rate of just over 5%. We expect to close on two multiyear extensions of our loans on Washington Square in Santa Monica Place during this month.
The $500 million Washington Square loan is expected to extend for four years until late 2026. The $300 million Santa Monica Place loan is expected to extend for three years until late 2025. We expect the weighted average floating rate on these two extensions to be approximately SOFR + 2.8%. Both loans will have interest rate caps in place, so they will effectively be hedged as fixed rate loans. Given these transactions are still pending, we are not at liberty to disclose further details of these transactions at this time. With those two deals collectively, we will have refinanced or extended nearly $1.4 billion of debt this year.
Including undrawn capacity on our line of credit, which we have about $424 million available, we have over $615 million of liquidity today. Debt service coverage is at a healthy 2.7 x. Net debt to forward EBITDA, excluding leasing costs at the end of the quarter, was approximately 9.0 x. We continue to be well-positioned in today's environment from both the standpoints of available liquidity as well as generating operating cash flow. With that, Doug I'll turn it over to you to discuss the leasing and operating environment.
Thanks Scott. Leasing momentum continued in the third quarter as evidenced by strong metrics and very high volumes. Third quarter sales were flat when compared to third quarter of 2021, and this was expected given the very strong sales in the third and fourth quarters of 2021. However, year-to-date sales are up almost 5% when compared to the same period last year. Sales per sq ft as of September 30, 2022 were $877 and once again, this represents an all-time high for the company. Trailing 12-month leasing spreads were 6.6% as of September 2022, compared to 0.6% last quarter and -2.5% a year ago. This is the strongest spread result we've had since the third quarter of 2019 pre-pandemic.
We're just about finished with our 2022 lease expirations, with nearly 90% of our expiring sq ft committed and the remainder in the letter of intent stage. While addressing our 2022 expirations, we've concurrently been working on 2023. To date, we have almost 25% of our 2023 expiring sq ft committed, with another 50% in the letter of intent stage. In the third quarter, we opened almost 250,000 sq ft of new stores. This brings our year-to-date store openings to just over 650,000 sq ft, which exceeds where we were at this time last year.
Notable openings in the third quarter include Sephora at Kings Plaza, Athleta at SanTan Village, Dr. Martens at Broadway Plaza, Garage at Scottsdale Fashion Square, The North Face at Washington Square, JD Sports at Fashion Fair and Vintage Faire, and two more stores with Cotton On at Kings Plaza and Queens Center. In the luxury category, we opened Louis Vuitton Men and Balenciaga at Scottsdale Fashion Square. We opened 15 new stores totaling almost 40,000 sq ft of digitally native and emerging brands in the third quarter. Kierland Commons in North Scottsdale remains a hotbed for this category as Allbirds, Avocado, Bad Birdie, Public Rec, and TravisMathew all opened there in the third quarter.
Other notable openings in this space include Madison Reed at Biltmore Fashion Park, Parachute Home at Twenty-Ninth Street, Purple at SanTan Village, and VinFast at Village at Corte Madera and Santa Monica Place. As we continue to transform our properties into true town centers, we're committed to bringing nontraditional uses to our campuses, and the third quarter was no exception. We opened Department of Motor Vehicles at Valley River, Kids Empire at Green Acres, The Shade Store at Country Club Plaza, and a veterinary hospital at Twenty-Ninth Street. Turning to the new and renewal leases that we signed in the third quarter. We signed 219 leases for 1.1 million sq ft. Year to date, we've signed over 700 leases for 2.9 million sq ft, and this is right about where we were at this time in 2021.
It's worth repeating, 2021 was our best leasing year in terms of volume and square footage since 2015. After years in the making, we're extremely pleased to announce the signing of Hermès at Scottsdale Fashion Square. Hermès, an iconic brand that is arguably the most sought-after luxury retailer in our industry, will open an 11,000 sq ft store, joining the likes of Louis Vuitton, Dior, Cartier, Saint Laurent, Versace, Prada, and Brunello Cucinelli, just to name a few. This will be Hermès' first store in Arizona, with its closest being in Las Vegas. The addition of Hermès will unquestionably make Scottsdale Fashion Square the primary luxury destination not only in the Scottsdale market, but in the entire state of Arizona. At the same time, making Scottsdale one of the most important luxury addresses in the United States.
Other notable leases signed in the third quarter include Louis Vuitton at Broadway Plaza, Gucci Men at Scottsdale Fashion Square, Arc'teryx and Kendra Scott at Tysons Corner, Aritzia at Village at Corte Madera, Dr. Martens at Los Cerritos, Free People Movement at Kierland Commons, JD Sports at Country Club Plaza, Lululemon and Lovesac at SanTan Village, and Levi's at Washington Square. In the Danbury Fair Mall, located in Danbury, Connecticut, in the third quarter, we signed a two-level, 20,000 sq ft deal with Barnes & Noble, where they'll relocate from an open air lifestyle center just down the road from our property. I bring this up because of all the chatter out there around retailers preferring open air lifestyle centers to enclosed shopping centers. This further proves my thesis that it's not about the venue, but rather it's about the best real estate.
With the recent additions of Target, Round 1, and other prominent brands and experiences, it's clear that Danbury Fair sits on the best real estate in the market, and retailers are proving that with their choices. At Queens Center, we signed leases with two very prominent and noteworthy international apparel brands totaling almost 100,000 sq ft, and we look forward to announcing these brands in the very near future. While it's hard to find game-changing tenants for Queens Center that already does over $1,700 per sq ft in sales, we believe this duo to be just that, both in terms of sales and traffic generation. In the third quarter, we signed leases with over 20,000 sq ft of digitally native and emerging brands across the portfolio, including Allbirds and Brilliant Earth at Broadway Plaza, Avocado at Twenty-Ninth Street and Washington Square.
Madison Reed and Outdoor Voices at Kierland Commons, ThirdLove at Tysons Corner, and Torrid Curve at Fashion Fair, and that's just to name a few. To reiterate the continued strength of our deal flow, year to date, we reviewed and approved 45% more deals for 35% more square footage than we did during the same period in 2021. Once approved, these deals move to documentation and are added to our already very strong leasing pipeline. This strong shadow volume bodes extremely well for continued occupancy and revenue growth for the remainder of this year, next year, and even into 2024. In conclusion, our leasing and operating metrics are solid. Sales are outpacing last year. Occupancy continues to increase. Leasing spreads are now positive in the mid-single digits, the strongest they've been in three years.
Leasing volumes are on pace for a second consecutive record-setting year. As I mentioned last quarter, although the future remains unknown and despite the macroeconomic backdrop and the looming potential of a recession, to date, we have seen very little pullback from the retailers, which I think is a result of the healthy retailer environment that exists today, as well as a testament to our best-in-class portfolio of shopping centers. Now I'll turn it over to the operator to open up the call for Q&A.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Keep in mind, if you're using a speakerphone, make sure that mute function is released to allow that signal to reach our equipment. Please limit yourself to one question and one follow-up question to allow everyone an opportunity to participate. Once again, star one for questions. We'll pause for just a moment. We will begin with Greg McGinniss with Scotiabank.
Hey, good morning out there.
Morning Greg.
Just looking at the development pipeline, hoping you could discuss changes in the disclosure with the removal of some of the potential Sears redevelopments, and then your thoughts on mixed use redevelopments as we stare at higher borrowing costs, higher construction costs, and looming economic risks.
Yeah, good afternoon Greg. Changes to the development pipeline, I mean, in terms of Sears, you know, we've really addressed the lion's share of the boxes, with the exception of those that we intend to scrape and add mixed use, and more densification. For example, we've completed the re-tenanting of the boxes at Vintage Faire, at Deptford Mall. We just mentioned the re-tenanting at Danbury with Target to accompany Primark. On a smaller scale, we re-tenanted the Sears box at a property in upstate New York, Wilton Mall, with a hospital use. We've really addressed most of those. We're still in entitlement and/or pre-leasing for Washington Square in Los Cerritos. Once we have projects to report, we'll certainly report those. Likely, they will land in our development pipeline. At this point, it was appropriate to remove those.
We have supplemented that now with two very exciting projects. One is effectively, again, a re-tenanting of three levels at Santa Monica Place. It's great real estate right across from the light rail station, and we intend to provide a variety of different and diverse uses to attract incremental traffic to that property. We're very excited about those uses, and we're at least at lease right now, in lease documentation with most of them. Very attractive returns as well. At Scottsdale, you know, it's really just an evolution of the luxury expansion that we did and we completed two-three years ago. Recall we intensified our luxury and concentrate our luxury in the run to Dillard's and Neiman Marcus, if you've seen it.
The names are global, the names are domestic, the names are thick and broad. As a result, really, it's been an incredible amount of demand. As a result of that continued demand, we're gonna continue that luxury leasing effort through the Nordstrom wing. Doug just mentioned in particular Amaze, which we had announced a couple months ago. Again, a very exciting project. Our pre-leasing is progressing at a very good level and very attractive returns. Lastly, you mentioned mixed use. I would say that, you know, generally, the unlevered yields in multifamily, you know, even at the beginning of the year, independent of the increase from borrowing costs, which are certainly a factor, but at the beginning of the year, those yields were in the, you know, 6% or so range on levered yields.
That really wasn't even attractive to us back then. As we've mentioned, though, Greg, our land positions are highly coveted within our communities. They garner a very significant value from many of our development partners. We would continue to envision deals in which we would either contribute the land by ground lease or contribute the land into a joint venture and participate in the NOI stream from residential uses and from office uses that way. We're, you know, that game plan really hasn't changed. I would say it's only been reaffirmed as a result of the increased borrowing costs in today's environment.
Thank you, I appreciate all the color there. Just sticking with development pipeline, are there any updates that you can provide us whether on 76ers stadium any numbers around that yet or, you know, working with the city on entitlements or ability to even, you know, do what you guys wanna do there? And then also on the Outlets at Carson.
Yeah. On Fashion District, can't report much more at this point. Our development partner continues to work with the city on entitlements. We continue to secure control of any space that's necessary to accommodate the development of the arena, which again would be several years down the line in the 2031 time frame, but which is when that would open. Nothing more to report certainly in terms of economics there. I would anticipate we may be in a position to give you more over the next few quarters. As far as Carson, that remains an ongoing legal matter, and I'm just not at liberty to expand on that right now Greg. Thank you though.
All right,t hank you.
We'll now hear from Derek Johnston with Deutsche Bank.
One, thank you. Can we hear your thoughts on the push and pull between increasing the dividend, especially with the stock where it's trading now, you know, versus potential other uses like ramping redevelopment or even deleveraging?
Yeah, sure. You know, just as a reminder, you know, we used the opportunity during COVID to reset our dividend along with the very robust recovery in the business. That's given us an opportunity to harvest a good amount of free cash flow. I mentioned that cash flow on an annual basis after payment of recurring CapEx, but before dividend payments, it's approximately $370 million. Fast-forward 2.5 years later, after we made those dividend decisions, you know, the business is on firm footing. We're very confident about the outlook of the business. We still remain committed Derek, to maintaining healthy payout ratios. We still remain committed to retaining cash flow to reinvest back in the portfolio and to reduce our debt.
At the end of the day, the dividend change that we made was approximately $18 million. You know, we do think it's important to get back into a cadence of, you know, increasing our dividend given the outlook for the business. No guarantees for future increases, but we would certainly hope to be in a position to, revisit that, you know, down the line as well. Really it's a, you know, firm vote in terms of our confidence for the business and the outlook for the business right now. We still remain committed, to reducing our leverage and to reinvesting back in the portfolio through developments and you know, Scottsdale and Santa Monica are great examples of that. You know, post-dividend change, our payout ratios are still, very acceptable, very low.
Leading into that, our payout ratios, by the way, were one of the lowest in REIT world. I think, there's a good balance between all three things, and we're gonna, you know, be mindful of the balance between our balance sheet reinvestment back in and also returning some capital to our shareholders.
Okay, great, m akes sense. Secondly, you know, you've had a pretty strong lease volumes here for a while at this point. Just hoping you could speak to the potential rent coming online over the next year, and the cadence of openings, you know, especially, after opening 250,000 sq ft in 3Q. I was wondering what you're anticipating for the fourth quarter and 2023. Thank you.
Yeah. Sure, Derek. Falling short of providing you guidance for 2023, you know, I'll say that, you know, the leasing pipeline continues to be real strong. Over the last few quarters now, it's exceeded 3 million sq ft, both between signed deals and deals that are in process. The deals that we review twice monthly continue to be a very strong, a very high volume agenda. You know, our view is we'll continue to see strong NOI growth, revenue growth coming from that. We do have a new disclosure in our investor deck. We'll continue to keep that updated as we move forward, which does provide the incremental rent impact that we would expect from any new stores that are coming online. You can refer back to that, ike I said, we'll keep that updated.
The view is, Doug unless you tell me otherwise, and I don't think that's the case, our pipeline's strong, and it doesn't show any signs right now of abating.
No, it sure doesn't, Scott. The question I get asked all the time, given what's going on in the macroeconomic environment out there and the looming recession is, you know, are the retailers pulling back? The short answer is, they're just not. We have a very, very healthy retailer environment right now. You know, those that were gonna fail pre-COVID ended up failing during COVID. We're left with a watch list that is as low as it's ever been and a lot of retailers out there with very healthy balance sheets. You know, we don't see this ending anytime soon.
Yeah.
Sounds good, t hanks everyone. That's it for me.
We'll now move to Craig Schmidt with Bank of America.
Thank you. I just wanted to maybe dig into what really drove the higher leasing spread. As you pointed out, it's the strongest it's been in three years. You know, are you getting more pricing power or was this an fortunate quarter that just played out well? Just looking for more explanation on the 6.6 leasing spread.
Yeah, good question Craig. You know, we've been talking about it for a few quarters now that with the pickup in occupancy, you know, we'd start to think we could start to push on rate, and that seems to be the case. You know, we got to 92% occupancy, which creates that tension between supply and demand. As we review deals again every other week, it seems like we're getting more and more pricing power. You know, any given quarter, it's kind of hard to tell. I think as we started the year, we were hoping that we'd get to kind of a healthy mid-single-digit leasing spread. In fact, I think maybe we've even spoken to that in a call or two ago, and we're pleased to be sitting here now.
As we look forward, you know, based on all the deals we're reviewing, I think that's a level we can continue to sustain. Doug any commentary on that?
No, I think you're spot on Scott. We talked about, you know, our main goal coming out of the pandemic was all about occupancy. You know, we've gotten ourselves in position now at a 92% occupancy level to be focusing on rate, which is exactly what we're doing.
I guess just it sounds like obviously you have a lot of confidence in the continuation of the leasing spread. Are your expectations for a holiday 2022 to be reasonably positive?
Yeah, I think so, Craig. You know, if you look at the national forecasts that are out there, they call for mid-single-digit type of holiday growth. We certainly won't see the 15% or so growth, mid-teens growth that we did in the fourth quarter of last year. You know, I think it's reasonable to assume based on our conversations with the retailers, they feel, you know, optimistic about some growth this year, just not as robust as last year.
Craig, it's Doug. You know, I've read a couple of surveys and, you know, it really excites me. It really feels like the vast majority of shoppers this holiday are gonna be shopping bricks and mortar, in addition to online, but bricks and mortar is in favor. You know, it's the delays in shipping, which were abundant last year, I think frustrated a lot of people. The shipping costs are getting expensive. I think bricks and mortar is gonna be very, very favorable this holiday.
Thanks for the color.
Thanks Craig.
Our next question will come from Samir Khanal with Evercore.
Hey Scott, g ood morning. I know you guys are not providing guidance for next year, but just generally, how are you thinking about, you know, potential tenant fallout, you know, sort of the post holidays, normally when we see them, right? Coming off a year where it's basically been nil or, you know, basically zero. Clearly positive momentum on the leasing side, but just trying to figure out if there's any sort of headwinds we sort of need to think about into next year.
Yeah. It's hard to say that we're going to have the same type of nil year in 2023 that we've experienced in 2022. You know, ordinarily right now, we'd start to hear from retailers that were setting themselves up for a major renegotiation, a major restructure. We'd start to hear from them and their consultants, and that's really just not the case. I think 2023 will likely be an unusually low year. I don't think it's going to be a nil year, but I do think it's gonna be a low year in terms of tenant fallout. You know, as well, I would say our renewal conversations with our retailers are still very strong. You know, they aren't coming in requesting to shed stores.
I think generally they've right-sized their fleets in the United States, and they're in expansion mode for the most part. We don't see them shedding stores, especially in our high-quality town centers. I think the backdrop is set for continued occupancy growth. There may be one or two here or there that file, but nothing that's on our radar screen at this point in time Samir.
I guess Doug, just shifting over to you in terms of, you know, the negotiations. You talked about retailers not, you know, pulling back. They're still continuing to open up stores. If you kind of take a step back, I mean, what are they pushing back on here? Is it primarily sort of higher TIs or CapEx? I mean, what's sort of the pushback you're getting as you kind of talked about that sort of 25% of leases that are committed and then the sort of balance you're negotiating?
Hey Samir, y ou know, the pushback, like always, whether it's you know, now or whether it's pre-pandemic, it's always a function of rate. You know, rate is a negotiation. I would say that tenant allowances are consistent. They haven't changed very much over the last several years. I would say the battle's always around rate. You know, thankfully, given the quality of our portfolio, we're able to get what we need to get.
Okay, got it. One more Scott, if I can, on the guidance range. I know you talked about land sale gains, maybe coming in, I think, lighter this year, but then we'll be shifting over to 2023. In terms of modeling, is this sort of a recurring kind of an item we gotta start putting into our models now? If so, what's sort of the magnitude we gotta think about sort of, you know, annually going forward?
Yeah Samir, we've most of the land sales are concentrated in our Arizona portfolio. These were land holdings that we've had on the balance sheet for 15-20 years as we, at one point in time, envisioned expanding that market with further regional town centers t hat's no longer the case. We've continued to sell through that inventory. We will continue to sell that inventory into next year. We'll provide you a little more clarity on the 2023 inaugural 2023 call when we give guidance. I think those will start to really subside in 2024 and going forward. There'll always be a little element of that with pad sales here and there, but I think by the time we get to the end of next year. A good majority of that will be exhausted. We'll give you a little more clarity in three months.
Got it, t hank you.
We'll now move to Floris van Dijkum with Compass Point.
Thanks guys for taking my question. It sounds like the underlying business seems to be doing pretty well. You've got 9% same store NOI growth year-to-date, record tenant sales, positive leasing spreads. Your SNO pipeline, it's fairly robust. It was $33 million expected of incremental revenue for next year, approximately. When do you guys think that you can get back to 2019 levels of NOI? You know, obviously not providing guidance for next year, but just how comfortable are you that you're gonna get there? You know, if you can give some color on that'd be great.
Yeah sure, Floris. I mean, we're very comfortable we're gonna get there. The question is when. You know, again, the pipeline is very strong. We do think that by the time we get to the end of next year, we'll be there on a leased occupancy basis. Obviously, there's some delay in start times for those new stores. Yeah, without giving you guidance in terms of 2023, I think on a run rate basis, we'll be there in terms of occupancy by the end of next year.
The other thing, the other question I had for you is in terms of your OCR, which is you know relatively low at 10.8%, I believe. We're starting to see your ability to push rate through. Can you maybe talk us through some of the you know the dynamics of that and how tenants are looking at rents relative to and their occupancy costs and relative to their ability to pay more rents going forward?
Yeah. You know, you're spot on. I mean, our ability to push rate, as indicated by spreads, is you know, negatively correlated with cost of occupancy at 10.8%, less than 11%. You know, that's about 100 basis points, I think, below where we were at the end of 2019. Is you know, probably if I went back in time, four- or five-year low for us. That's a you know, kind of a leading indicator of our ability to likely push rents given the profitability of our portfolio. Doug, do you wanna?
Yeah. I would say, you know, less and less cost of occupancy is becoming less and less relevant. You know, these stores in our town centers are more than for the retailers, are more than just selling merchandise. You know, they buy online, pick up in store. They buy online, ship from store. While cost of occupancy is still important and something we look at, we really look to the value of our real estate and our properties, and that's how we price our real estate, not necessarily strictly off of cost of occupancy.
Bear in mind Floris, you know, competition, which there certainly is competition for our better real estate, also allows you to push rate. And so we're certainly seeing those situations where there's a competitive situation as we lease space.
Thanks, m aybe a last question for me is in terms of specialty leasing. It's really hard for investors to figure out. Okay, it doesn't show up in leasing spreads. It doesn't typically show up in other things. How is that progressing? What are you seeing for kiosks and billboards and parking and other ancillary revenue? As the economy gets better, how much more ability do you have to increase that amount?
Great question Floris. I think we've spoken to this before, and I'll just confirm that, you know, that's one segment of our business that will in fact be back to pre-COVID levels this year. The local merchants, the advertising contracts, that all that ancillary revenue, parking revenues, et c., have bounced back extremely well. You know, we're if you look at our occupancy, we're still north of 7% in terms of our temporary tenancies. You know, there's always a push and pull between Doug and his counterpart that's in that temporary tenant kind of specialty leasing world. Anytime we're able to convert those deals to permanent uses, you're talking about a pickup in rent that's probably 2x-2.5 x what the temporary tenant was paying.
That certainly should be a big component of our growth going forward, is converting temporary occupancy to permanent occupancy. The good news is the local merchants with which we worked with extensively throughout the pandemic have recovered quite well. We've shed some, but certainly the demand has maintained very strong. We're looking forward to converting that to permanent, though.
Thanks, t hat's it for me.
Our next question comes from Linda Tsai with Jefferies.
Hi. Recovery of bad debt has been a tailwind in 2022 and you know, netting that with the view that tenant fallout is likely low in 2023, is the bad debt line item a headwind or still a potential tailwind to earnings in 2023?
Hey, Linda. I would say it's probably relatively neutral. You know, GAAP forces you once retailers are showing significant signs of weakness and not being able to meet their contract rent for the remainder of the lease term, GAAP compels you to reserve those receivables in their entirety. We've certainly received some benefits of collections of those this year. We'll see that to a lesser extent in 2023. I think it's gonna be relatively neutral. It's not a big needle mover, but we, you know, we don't see a huge bad debt line item at this point in time next year.
Got it. On Hermès opening in Scottsdale, how are luxury retailers thinking about their U.S. store growth plans over the next two to three years?
Hey, Linda, it's Doug. Luxury is a very strong category right now in the United States. The luxury tenants are very active. You know, they're looking hard at Scottsdale, and as Scott mentioned earlier, you know, we finished our remix with the Neiman Marcus wing and are gonna move now to the Nordstrom wing. We probably have more demand right now from the luxury sector than we have space. You know, we see it as very aggressive, but keep in mind, you know, we don't have a lot of luxury. Our luxury really is focused around Scottsdale Fashion Square, Fashion Outlets of Chicago, and to a lesser extent, Santa Monica Place.
Thank you.
We'll now move to Connor Mitchell with Piper Sandler.
Hi, thanks for taking my question. I just have a couple. First, in Alexander's earnings release, they reported that IKEA that was recently opened at Rego Park, is now leaving. Do you guys see any tenants potentially closing up early at urban locations? Do you think this might be a one-off or if a similar situation could be possible elsewhere?
No, I don't think so. I mean, there's always gonna be situations where a store underperforms, and they're going to leave. I don't think that's an indictment necessarily on large format urban locations, though Doug.
No. I mean, I would consider Kings Plaza in Brooklyn an urban location. I would consider Queens Center in Queens an urban location, and we've seen little to no fallout in either one of those centers. I think that's sort of indicative of what's going on in the urban world within our portfolio.
You know, the good news is, in some of those locations, the opportunity to backfill is pretty significant. Doug, you alluded to Queens Center t hat's roughly 100,000 sq ft with two very prominent apparel retailers that we're not at liberty to disclose right now. As space does come up, the opportunity to backfill them with, frankly, incrementally accretive resources from a sales and traffic generation is pretty high.
Okay, appreciate that.
Yep.
Regarding One Westside, now that it's open and Google has moved in, do you see yourself harvesting these type of assets, the non-core assets, and selling your position? Or how do you view the market, your stake, and the ability to transact to these type of assets?
Well, One Westside's certainly unique. It's a single tenant, Google credit. You know, you can look and see what the cap rates are for that. It's very attractive. There's mechanisms in that joint venture agreement I can't get into that do allow for a transaction to occur. You know, in the meantime, we're going to enjoy the diversity of NOI from Google, which is obviously a fantastic credit. We're certainly celebrating the conversion of a regional mall project that is no longer a retail project. It's now a Google campus of 600,000 sq ft it 's very noteworthy. You know, we'll hold on to that NOI, and at the appropriate time, we'll go ahead and consider something.
Okay. If I could, just one last quick one. Regarding Washington Square at Santa Monica Place, are you guys expecting any extensive or heavy principal paydowns with the extensions, if you could speak on that?
Yeah, I can't get into the details. Those are transactions that are pending, so it'd be inappropriate for me to do so. I'll just tell you that, you know, we've exercised our ability to secure extensions and refinancings for the last couple years with very little capital to pay down. I'm not sure that's gonna be any dissimilar to what we're doing with Washington Square and Santa Monica, but we can't get into specifics there. We will report once those transactions are closed, which should be in the next few weeks.
Yeah, u nderstood. Oka, t hat's all for me. Thank you.
Thank you.
We'll now hear from Mike Mueller with JP Morgan.
Yeah. Hi, j ust a quick one here. What are some of the dynamics driving the Santa Monica Place redevelopment return to be, call it, close to two times higher than the Place redevelopment at Scottsdale Fashion Square?
Well, extremely attractive real estate for starters. It's positioned across from a light rail that, you know, prior to COVID, delivered 7,000 commuters per day to the doorstep of that three-level, you know, configuration. There's a great opportunity to do something there. Santa Monica is obviously a heavy tourist community. International tourism has subsided during COVID. We see that starting to tick up, but domestic tourism seems to have almost fully replaced that. It does feel like my commute's a little bit longer now, so I think the office population, the daytime population is improving here in Santa Monica incrementally.
If you look at our project in Santa Monica, relative to the balance, which is Third Street just due north of it, you know, we're able to privately secure, privately maintain, our project in a little bit of a different fashion, than, say, Third Street Promenade. I think that is deemed to be a significant advantage as well. We're pretty excited about the uses, you know, ranging from, you know, kinda 3x to 4 x a week uses with fitness to co-working. And those two, by the way, of course, interplay with each other perfectly. Very synergistic t hen lastly, we're very excited about the destination entertainment use, and we will provide you more details on those as soon as we can once those leases are fully negotiated. It's really highly coveted real estate is the fundamental underpinning there.
Well, I think Scott you alluded to this earlier, competition for space. This is a perfect example of where we had more interest than we had available space. While our goal was to come up with the perfect mix for the property to generate foot traffic to Santa Monica Place, we had the luxury of more interest than we had space, and that, by definition, would drive rate. I think that's why you're seeing some of the higher returns there.
Yeah, great point Doug. I mean, we went through multiple iterations of laying that out with a variety of different uses. Again, competition creates rent.
Got it, o kay. Thank you.
We'll now move to a question from Ki Bin Kim with Truist.
Thank you, g ood morning. Just a couple of quick questions on the balance sheet. I noticed in your debt disclosure, you talked about the Washington Square Mall and Santa Monica being potentially refinanced this month. Looking at the SOFR and the spread, you know, Washington Square Mall at a 4% spread, Santa Monica at one and half. Just curious, I know you don't wanna go into too much detail, but just those are two high-quality malls with widely different spreads. If I remember correctly, Washington Square was, you know, plus $1,500 a sq ft sales mall. Curious if that's somewhat indicative of what we can expect on a pricing perspective for some of your other future refinancings. Thank you.
God afternoon, Ki Bin. I really can't comment much further at all on Washington Square and Santa Monica and the unique differences between each. You know, the debt markets, you know, some of the lenders do view these transactions as effectively new money going out, so they price it contemporaneously with where they view things are at. I just can't get into the dynamics of each, though. On balance, though, we do feel good about the execution, which is, you know, again, 280 over SOFR. But you can't look at one deal and broadcast that over the entire population. What we're certainly aware of is every deal is unique, and every deal is going to arrive at different terms.
Okay. Just one question on the Santa Monica loan. Is that price at all benefiting from like an option type of agreement that you had previously?
No. The maturity on the Santa Monica loan is December of 2022.
Okay. Just last question Scott. Was there any benefit from conversion of cash basis tenancy to accrual this quarter?
Very little. You kinda see it a little bit in our bad debts, which were marginally positive, less than $1 million. You'll see a little bit of it there, but it's not significant.
Okay. Thank you guys.
Thank you Ki Bin Kim.
We'll now hear from Craig Mailman with Citi.
Hi. I'm just kind of curious, looking at the 2023 debt maturity schedule. Any update on where you are with Green Acres or Scottsdale in the process there?
Yeah. We are in the market. You know, those are two very unique assets. Green Acres is one of our very few billion-dollar campuses, which generates $1 billion of annual sales revenue across the board. It's everything from, you know, major big box national retailers, household names, to grocery, to traditional mall uses. It's a bit unique in terms of its makeup and its flavor. Scottsdale Fashion Square is a top 10 asset in the United States with a huge redevelopment under its belt, luxury momentum and more to come. Those are two unique assets that we are in the market on right now. We'll continue to report over the next few months our progress on those two.
Do you think those will be extensions similar to recent deals, or would lenders be kinda open to refinance or kinda rolling the debt?
Yeah, again, you know, we're in the market right now, which, you know, means I think they'll be attractive refinance candidates because of the unique nature of them. I think we'll have other refinance candidates as 2023 rolls on.
Okay. Just one quick one on the land sale gain that got delayed. Is that under contract and just the timing got pushed out, or is that sort of a prospective placeholder in 2022 guidance that you guys are now just pushing out given the transaction market?
It's a specific deal. It's under contract. You know, those deals sometimes take a little time to come to fruition, including getting entitlements in place to provide the uses that the buyer is developing for. It's just a matter of timing.
Okay, great. Thank you.
Sure.
Our next question comes from Haendel St. Juste with Mizuho.
Hi, this is Ravi Vaidya on the line for Haendel . I hope you guys are doing well. I had a follow-up on leasing spreads. Does the denominator include a large portion of COVID adjusted leases where lower base rents were exchanged for lower break points on percentage rents? For your leases signed now and going forward, have you guys reverted back to a traditional lease structure?
Yeah. The population is everything that's expired in the last 12 months t hat's the comparison point versus everything that we've signed in the last 12 months. Yeah, it's very possible that some of those pre-COVID deals are reflected in that number that will continue to be the case. You know, we've been saying for a bit of time that as we continue to convert those deals, which, you know, way back when had a lower fixed rent element and a heavier variable element, as we convert those, you know, we'll get a stronger rent structure with fixed rents and annual increases, and that will be the case. There's a bit of that in the spreads. We can't quantify that for you, but there's a bit of that.
We're very much, you know, leasing on a normal basis right now, which is fixed minimum rent with annual increases, fixed common area maintenance with annual increases that are slightly higher than the base rent, and tax recovery. They're triple net deals.
Got it, t hanks for the color. Just one more here. You had strong sales in the quarter, sales per foot. How much of this would you attribute to higher foot traffic? How is foot traffic trending year over year? Would you say that it's foot traffic that's driving the strong sales or is it inflation?
Yes. Foot traffic has been really consistent this year. Range bound, I'd say between 95%-100%. Foot traffic has been very consistent relative to pre-COVID levels. You have a combination of tenants that are performing very well. Luxury has certainly been a category that's performed well for us. You've got just generally a better, a healthy sales environment as we look at all of our categories. I'd say, footwear is the only category that's mildly negative, and everything else is trending positive. It's really kind of an across the board thing, but our traffic has held up well. You know, there certainly is some impact of inflation in there as well.
Got it, t hanks for the color guys.
Thank you Ravi.
We have a question from Ronald Kamdem with Morgan Stanley.
Hey, just a quick one and apologies if you addressed this already, but previously you commented on sort of the leasing activity coming in slightly ahead of sort of 2021 levels and potentially getting back to pre-COVID occupancy by the end of 2023. Just sort of curious, as you know, as you're sort of seeing the activity today, does that still make sense? Maybe is that better or worse than you expected at this point?
Yeah, it still makes sense based on the deal flow that we're seeing today. Doug did provide some commentary that we are not hearing from retailers that they intend to slow or stop their new store expansions. You know, we still think that the view is supportable, that we'll continue to gain occupancy and we'll see continued NOI growth into next year and the year beyond. I think that holds. Doug, anything different?
Nope. I have nothing to add to that Scott. As I said before, we have a very healthy retailer environment out there, and I talk to the retailers all the time and, you know, we're not seeing the fallout that you might think given what's going on in the economy.
Yeah, just to underscore that, I mean, brick and mortar in a great spot, and I think that's a theme that you've heard from our sector over the last few days.
Great. The last one if I may, just on the financing side. You know, I guess you guys are working through some multi-year extension. Any sort of idea where rates are indicated, where things are looking to shake out in terms of debt cost at this point, on those deals? Thanks.
Yeah, I would say Ron, on balance, you're talking about secured financings are gonna be in the low to mid sixes. You're gonna have some that are better, you're gonna have some that are worse. It's hard to figure out where that stands on a weighted average basis. Could be more towards the low end of the sixes, but that's probably a reasonable outcome on average.
Great, t hanks so much.
Thank you.
Ladies and gentlemen, that's all the time we have for questions today. I'll turn the call back over to Scott for closing remarks.
Well, thank you everybody, for joining us. We continue to enjoy, you know, strong operating results during the year and strong demand from our tenant community. We look forward to seeing many of you in person or virtually during our upcoming Investor Day, which is in Scottsdale. It's on November 29th through November 30th. Thank you for joining us today.
With that ladies and gentlemen, this does conclude your conference for today. Thank you for your participation, and you may now disconnect.